ESM succeeds European Financial Stability Facility, a temporary bailout fund created in 2010

Brussels: The eurozone on Monday inaugurated its permanent bailout fund, the European Stability Mechanism (ESM), in the hope that it will help alleviate the financial crisis that has hounded the common currency area for more than two years.

The ESM succeeds the European Financial Stability Facility (EFSF), a temporary bailout fund that was created in 2010 after Greece became the first eurozone country to need a full-fledged financial rescue.

The EFSF could lend up to 440 billion euros (574 billion dollars), backed by €780 billion in guarantees from the eurozone’s 17 member states.

The ESM packs a greater punch, as it can lend up to €500 billion. Combined with the EFSF’s remaining lending power, the eurozone will now have what it calls a 700-billion-euro “firewall”.

“This is a historical achievement for European integration and a pledge of stability and sustainability for future generations,” Jean-Claude Juncker, the president of the Eurogroup panel of eurozone finance ministers, said recently.

The ESM is backed by capital and guarantees from eurozone states, with Germany, France and Italy the largest contributors at more than 100 billion euros each.

Germany had held up the launch of the ESM — originally expected in July — after anti-bailout groups challenged the measure before its constitutional court. Judges cleared the ESM in September, but not without demanding that Germany’s liability be capped.

The fund’s first client is expected to be Spain, who was granted up to €100 billion for its troubled banks through the EFSF. The rescue package is due to be transferred to the new bailout fund.

Madrid is keen to have the ESM handle the aid because it will be able to recapitalise banks directly, which would keep the debt off Spain’s books.

But eurozone leaders have made any direct recapitalisation conditional on the common currency area first introducing a new banking supervision mechanism, a measure not expected to be in place until at least next year.

The EFSF has also come to the rescue of Ireland, Portugal and Greece. The countries must deliver austerity and reform measures in exchange for the aid.

The EFSF will continue to fund those existing bailout programmes, but is not expected to be involved in any new rescues after July.

In addition to loans, the EFSF and ESM have other powers at their disposal to bolster troubled countries, including market interventions and credit lines.

An ESM market intervention is seen as a prerequisite for the European Central Bank to also buy the bonds of troubled countries, which in the past has helped calm jittery markets.

The ESM is based in Luxembourg and is set to be run by Germany’s Klaus Regling, who already served as the chief executive of the EFSF.